landay 1

1

290T: The Business of SoftwareThe Software Industry

Professor Kurt KeutzerFall 2003EECSkeutzer@eecs.berkeley.edu

Kurt Keutzer2

Class News• Target class size (new course) was 30• If you’re registered, and plan on sticking it out, please show up• If you’re registered, and would rather do something else, please

drop• If you’re not registered, and plan on attending, please register

landay 2

Kurt Keutzer3

Class Etiquette (ala Drew Isaacs))

1. Be on time. I will begin class at 4:10 PM. If you arrive after 4:10, you will not be admitted to class that day.

2. Come to class prepared, and expect cold calling.

3. Please (make and) use your name card throughout the semester.

4. Beverages are permitted in class, but food is not.

5. If you cannot make a class meeting, or if you will be late for class, send Niraj (niraj@eecs.berkeley.edu) and me (keutzer@eecs.berkeley.edu) an e mail advising me of this in advance. The same is true if you must miss a guest speaker.

6. Laptops, PDAs, cell phones and similar electronic devices will be turned off during class and left in your backpack or briefcase.

Kurt Keutzer4

Outline• Evolutionary Models of the Software Industry

• Actual Evolution of the Industry

• The SW industry as it stands today

landay 3

Kurt Keutzer5

SeSoSu’s History of Software• Independent programming services (era 1)

• CUC (1955), Computer Sciences Corporation (1959)• One solution at a time• Consulting business model

• Software products (era 2)• Principally around IBM 360 platform• Mark IV file management from IBM, 1967• my favorite Reynolds and Reynolds’s EPIC/RAPIC 1966, 1967• See their history at: http://www.reyrey.com/about/history.asp

• Enterprise solutions (era 3)• Independent software solutions deployed at enterprise level (e.g. SAP,

founded 1972)• Packages software for the masses (era 4)

• Microsoft 1975, DOS 1981• “Face of the software industry today” (era 5)

• Internet targeted• Netscape 1994

Kurt Keutzer6

Relationship of Solutions

Professional Services

Enterprise Solutions

Mass MktPackaged SW

How about price?Solution cost to end user?

landay 4

Kurt Keutzer7

SeSoSu’s History of Software• Independent programming services (era 1)

• CUC (1955), Computer Sciences Corporation (1959)• One solution at a time• Consulting business model

• Software products (era 2)• Principally around IBM 360 platform• Mark IV file management from IBM, 1967• my favorite Reynolds and Reynolds’s EPIC/RAPIC 1966, 1967• See their history at: http://www.reyrey.com/about/history.asp

• Enterprise solutions (era 3)• Independent software solutions deployed at enterprise level (e.g. SAP,

founded 1972)• Packages software for the masses (era 4)

• Microsoft 1975, DOS 1981• “Face of the software industry today” (era 5)

• Internet targeted• Netscape 1994

Kurt Keutzer8

Anything wrong with this picture?

• Mixes underlying technological evolution with industry trends

landay 5

Kurt Keutzer9

The Cycle of Software Market Evolution

Servicessolution

Marketopportunity

TurnkeyHW/SW

EnterpriseSW

BroaderMarket

SW

Kurt Keutzer10

Elements of the Cycle• Market opportunity emerges

• Integrated circuit design• Problem poorly understood but with a few experts and homegrown

software tools a service solution is provided• IC design services at IBM, Bell Laboratories (1975-1984)

• Partially to simplify software development, partially to exploit buying behaviors and maximize revenue, partially to exploit hardware capability, bundled HW/SW solutions are provided• Mentor Graphics (MENT) 1981, Valid Logic Systems 1981, Daisy 1981• Bundled IC design software with hardware

• Then to simplify SW development, lower entry costs, and exploit inexpensive platforms, unbundled SW solutions running on standard platforms are provided (at high aka ``enterprise’’ prices)• Gateway Design Automation 1985?, Synopsys 1987

• Market grows, more ``license seats’’ to sell to, attracts ``lower cost’’ solutions• Synplicity, FPGA Express, Get2Chip

landay 6

Kurt Keutzer11

Inherent force of the Cycle• As the fundamental technologies underlying a software solution

become better understood, other forces being equal, then the cycle will progress ``forward’’ because it implies a cost reduction for the end customer

Kurt Keutzer12

Where do Internet VAS fit in?

Servicessolution

Marketopportunity

TurnkeyHW/SW

EnterpriseSW

BroaderMarket

SW

landay 7

Kurt Keutzer13

How about here?

Servicessolution

Marketopportunity

TurnkeyHW/SW

EnterpriseSW

BroaderMarket

SW

InternetVAS

Kurt Keutzer14

Shaping the Software Industry• End-customer market dynamics

• Living in the information age• Global competitiveness – cost reduction• What if gas prices went to $4? $8?

• Technological dynamics• Moore’s Law• Decreasing cost of communication• What if Pentiums cost $1

• Financial market dynamics• NASDAQ, S&P, DJIA• IPO madness/IPO glut• Venture Capital Temperament• What if you didn’t need profit, or even a business model to IPO?

• Software Market Cycle (previous slides)

landay 8

Kurt Keutzer15

Who gets stuck? Why?

Servicessolution

Marketopportunity

TurnkeyHW/SW

EnterpriseSW

BroaderMarket

SW

InternetVAS

Kurt Keutzer16

Who gets stuck? Why?

Small marketEach customer unique

Human intensive

Marketopportunity

SW too linkedto HW

Small``seats’’

Highvalue

No value added

from web

InternetVAS

landay 9

Kurt Keutzer17

Outline• Evolutionary Models of the Software Industry

• Actual Evolution of the Industry

• The SW industry as it stands today

Kurt Keutzer18

Actual Evolution of SW Industry• From Jacquard’s Loom (1804) through Hollerith (1890) through IBM

360 (1964) SW is surprisingly the same – strongly linked to and encapsulated in hardware and principally seen as a vehicle for executing hardware

• IBM 360 became a stable platform for developing software but …• IBM had the market so locked up there was very little opportunity

for others• Few examples, such as:

• Reynolds and Reynolds: http://www.reyrey.com/• 1966 - A new data processing service for dealers, EPIC

(Electronic Parts Inventory Control) was announced and offered to a limited number of pilot institutions.

landay 10

Kurt Keutzer19

The True SW Industry - Founding1972 – SAP1975 – Microsoft, Bill Gates1977 – Oracle, Larry Ellison1981 – Infosys1982 - Adobe1982 – Electronic Arts 1982 – Symantec1982 – Amdocs1983 – Solomon Design Automation => Cadence, James Solomon1983 – Intuit 1984 – Sybase1987 – Peoplesoft, David Duffield1987 – Synopsys, Aart de Geus1989 – Mercury Interactive1989 - Veritas1993 – Siebel, Tom Siebel1993 – Check Point Software1995 – Verisign 1995 – BEA, Alfred Chuang, William Coleman, Edward Scott

Kurt Keutzer20

What they do• Microsoft Corporation (MSFT) PC Software (revenue

leader Application Software)• Oracle Corporation (ORCL) database, application

server (2nd highest revenue, Application Software)• SAP ADR (SAP) business management software (3rd

highest revenue, Application Software)• Computer Associates Int’l integrated software

solutions (4th highest revenue, Application Software)• Veritas Software Corp. (VRTS) secure and reliable data

management (5th highest revenue, Application Software)• Electronic Arts – video games (revenue leader

Multimedia & Graphics)

landay 11

Kurt Keutzer21

And What they do …

• Intuit, Inc. personal financial software (7th highest revenue, Application Software)

• Symantec – (SYMC) computer and network security• Adobe Systems, Inc. PC application software • Symantec – computer and network security software• Infosys Technologies Ltd. (INFY) international software

conglomerate (4th highest revenue, Technical & System Software)

• PeopleSoft, corporate ``information factory management’’(5th highest revenue, Application Software)

• BEA Systems, Inc. (BEAS) internet business infrastructure/web servers (3rd highest revenue, Business & System Software)

Kurt Keutzer22

And What they do …• Synopsys - (my old company) – software for the design of

integrated circuits (2nd highest revenue, Technical & System Software)

• Amdocs - billing and customer relationship management• Siebel Systems, Inc. (SEBL) enabling ecommerce channels

(8th highest revenue, Application Software)• Check Point Software Tech (CHKP) secure virtual networks

(2nd highest revenue, Security Software)• Cadence Design – (currently consultant) software for the

design of integrated circuits (revenue leader, Technical & System Software)

• Mercury Interactive – business application management• Verisign – the world's leading provider of critical infrastructure

and security services for Internet and Telecommunications networks

landay 12

Kurt Keutzer23

How they Did - SW Industry IPOs1972 – SAP, IPO 1988, SAP ADR on NYSE 19981975 – Microsoft, 3/13/86, $211977 – Oracle, 3/12/86, $151981 – Infosys, 3/11/99, $341982 – Adobe, 8/86, $111982 – Electronic Arts, 9/89, $81982 – Symantec, 6/89, $10.50 1982 – Amdocs, 6/98, $141983 – Intuit 3/12/93, $201984 – Sybase, 8/13/91 $13.51987 – Peoplesoft, 10/92, $171987 – Synopsys, 2/25/92 , $181989 – Mercury Interactive, 10/29/93, $131989 – Veritas, 12/9/93, $161993 – Siebel, 6/27/96, $171993 – Check Point Software, 6/96, $141995 – Verisign 1/30/98, $141995 – BEA, 4/10/97, $6http://www.ipomaven.com/ipoprofilese.php3http://www.forbes.com/equities/

Kurt Keutzer24

Origins of the True SW Industry• Characteristics of the real SW industry that was emerging

• Founders were SW people, not HW retreads• Second generation SW developers and managers - many

initially working for IBM etc.• IP in SW developed could eclipse the IP of the HW it was

running on• Over time, SW was platform independent• Strongly linked to the financial markets

landay 13

Kurt Keutzer25

$ Raised in IPO

$30mm4/97BEA1995$42mm1/98Verisign1995$18.8mm12/93Veritas1989$42mm6/96Check Point Software1993$33mm6/96Siebel1993$26mm10/93Mercury Interactive1989$27mm2/92Synopsys1987$29.3mm10/92Peoplesoft1987$49.5mm8/91Sybase1984$20mm3/93Intuit1983$252mm6/98Amdocs1982$16.5mm6/89Symantec1982$11.2mm9/89Electronic Arts1982$5.6mm8/86Adobe1982$31.5mm3/86Oracle1981$65mm3/86Microsoft1975180DM1988SAP1972$ raisedIPOCompanyFounded

Dow Jones News, Company Press Releases –By means of Factiva

Kurt Keutzer26

Forces on SW Industry

Secrets of Software Success – Figure B-1, p. 271

landay 14

Kurt Keutzer27

Financial Markets –S&P500

S&P 500 (1970 - Present)

0

200

400

600

800

1000

1200

1400

1600

Jan-70

Jan-73

Jan-76

Jan-79

Jan-82

Jan-85

Jan-88

Jan-91

Jan-94

Jan-97

Jan-00

Jan-03

Kurt Keutzer28

Dow-Jones Industrials

DJIA (1970 - Present)

0

2000

4000

6000

8000

10000

12000

Jan-70

Jan-73

Jan-76

Jan-79

Jan-82

Jan-85

Jan-88

Jan-91

Jan-94

Jan-97

Jan-00

Jan-03

landay 15

Kurt Keutzer29

NASDAQ

NASDAQ (1984 - Present)

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

Oct-84 Oct-87 Oct-90 Oct-93 Oct-96 Oct-99 Oct-02

Kurt Keutzer30

Outline• Evolutionary Models of the Software Industry

• Actual Evolution of the Industry

• The SW industry as it stands today

landay 16

Kurt Keutzer31

Industry sectors – top downRevenues

Basic Materials, 449.9 Capital Goods,

460.7

Consumer Cyclical, 878.1

Consumer Non-Cyclical, 654

Energy, 753.2

Financial, 1269.9Healthcare, 527.6

Services, 2264.2

Technology, 955.3

Transportation, 242.8

Utilities, 607.3

Multex Market Guide – top down TTM

Kurt Keutzer32

Industry Sectors bottom upBy Revenue (TTM)

Capital Goods , 565,138

Healthcare , 727,527

Services , 3,173,031

Technology , 1,290,319

Conglomerates ,

635,524

Consumer Cyclical ,

1,583,882

Consumer/Non-

Cyclical , 938,914

Energy , 1,554,789Financial ,

2,181,786

Basic Materials , 777,327

Utilities , 819,970

Transportation ,

333,376

Multex Investor – bottom up TTM

landay 17

Kurt Keutzer33

Industry Sector – bottom up %

By Revenue (TTM)

Capital Goods

4%

Healthcare 5%

Services 22%

Technology 9%

Conglomerates 4%

Consumer Cyclical

11%

Consumer/Non-

Cyclical 6%

Energy 11%Financial

15%

Basic Materials

5%Utilities

6%

Transportation 2%

Entire Technology Sector

$1290B

Kurt Keutzer34

Tech sector – top downTechSector2

Communications Equipment , 97.8

Computer Hardware , 197.4

Computer Networks , 14.3

Computer Peripherals , 97.1

Computer Services , 148.1

Computer Storage Devices , 20.5

Electronic Instr. & Controls , 114.6

Office Equipment , 30.8

Scientific & Technical Instr. , 30.3

Semiconductors , 96.1

Software & Programming , 105.6

Software 105.6 / 11.1%

Services 148.1/ 15.5%

Entire Technology Sector

$952B

Source: Multex Market Guide – top down TTM

landay 18

Kurt Keutzer35

Technology Sector – bottom up

TTM Revenue Breakdown

Software & Programming,

127,737

Semis, 147,624

Sci & Tech Instr, 31,610

Office Eqpt, 49,305

Electronic Instr. &

Controls, 144,429 Computer

Storage Devices, 27,023

Computer Services, 192,348

Computer Peripherals,

126,283

Computer Networks,

15,805

Computer Hardware, 201,226

Comm Eqpt, 226,929

Multex Investor – bottom up TTM

Entire Technology Sector

$1290B

Kurt Keutzer36

The size of the SW workforce• 2.2 million people were employed in the four "core" IT occupations

• computer scientists – among fastest growing professions• computer engineers – among fastest growing professions• systems analysts – among fastest growing professions • Programmers - growth for programmers is much slower, due

to the effects of automation and outsourcing of work. • A single employment sector, Computer and Data Processing

Services, employs more than a quarter of all of these people and is the fastest growing industry category.

• From:"Core Occupations of the U.S. Information Technology Workforce"

• http://www.uefoundation.org/wfrep1.html

landay 19

Kurt Keutzer37

Human elements of IT Industry• 20 million new jobs have been created in this country over the past

seven years ;• Between 1995 and1998, the IT sector has contributed one-third of

all U.S. economic growth;• Between 1996 and 1997, falling prices in the IT sector have knocked

almost a full percentage point off inflation;• (IT now accounts for nearly one-half of all business investment)• And the marketplace is responding. E-commerce in the U.S. could

reach $1.3 trillion by 2003.• Workers in the IT industry earn 80 percent more than the private

sector average--$53,000 as compared to $30,000.

• Testimony of Harris N. Miller• President, Information Technology Association of America (ITAA)

• http://www.itaa.org/govt/cong/c19991208.pdf

Kurt Keutzer38

Software and Services in Context

# of

Companies

P/ETTM

ProfitMargin %

Price

/Sales

ROE%

Sale

s($ Bil)

LT

Debt/Equity

5 yr EPS

Growth %

Technology (Sector) -- 34.5 0.0 4.8 8.8 952.7 0.3 8.8 Communications Equipment 246 37.1 6.7 5.6 4.4 97.8 0.1 18.3

Computer Hardware 61 26.8 5.2 1.8 29.8 197.4 0.4 5.7

Computer Networks 76 44.5 2.7 3.2 5.3 14.3 0.2 17.8

Computer Peripherals 98 32.5 0.9 1.4 2.7 97.1 0.2 3.2

Computer Services 352 26.2 9.2 3.5 -7.3 148.1 0.5 18.3 Computer Storage Devices 40 29.1 1.9 3.7 5.2 20.5 0.1 -6.9 Electronic Instr. & Controls 242 29.9

-4.6 1.9 -0.9 114.6 0.4 -1.3

Office Equipment 25 22.7 5.1 1.3 20.3 30.8 1.9 -14.6 Scientific & Technical Instr. 144 27.7 5.7 3.4 13.7 30.3 0.4 14.1

Semiconductors 222 52.1 4.0 6.1 2.9 96.1 0.2 -10.6

Software & Programming 587 30.9 20.

2 7.0 15.0 105.6 0.1 18

What does it mean that there are 587 SW companies?What does it mean that there are 352 computer service companies?

landay 20

Kurt Keutzer39

Today’s Software Market Segments

• Application Software - enterprise application software, supply chain management solutions, document management, relational database management, financial and business applications

• Multimedia & Graphics - multimedia based software, including interactive, entertainment and games, graphic design and publishing, and educational software

• Technical & System Software - technical software including design automation, design analysis and optimization, computer-aided design (CAD) and computer-aided engineering (CAE), scientific and engineering software

• Security Software - security software, solutions and products that protects data and software on computers and networks

• Business Software - software for various business applications including retail automation, transactions and billing, staffing and cost-management, banking and accounting, real-time information management

Services:• Information Technology Services - Companies that provide computer technology

consulting, development and implementation services in order to solve information technology problems of various organizations

• Healthcare Information Services - Companies that develop and provide comprehensive physician practice management systems and software for hospitals, medical practices and managed-care organizations.

Source: Media General Financial Services

Kurt Keutzer40

Software Market Segmentation

Software Market (not incl services)

$100.9B

Application Software, $74.11B

Healthcare Information

Services, $3.41B

Information & Delivery

Services, $59.72B

Business Software & Services, $55.75B

M ultimedia & Graphics Software, $8.18B

Technical & System

Software, $10.44B

Security Software & Services, $2.83B

Software & Services Market

$229.8B

Application Software, $74.11B

Multimedia & Graphics Software, $8.18B

Security Software, $2.83B

Technical & System

Software, $10.44B

Business Software,

$5.33B

landay 21

Kurt Keutzer41

Software Industry 8/2003 -1

$0.25$32.$27.NM(22.3)$3463$9095SFTBFSoftbank (ADR)

$47.51$86.3$84.939.313.2$2504$12528ERTSElectronicArts

$10.29$31.8$30.51684.9$ 1579$12668VRTSVERITAS

$8.65$26.1$24.5NM(6.1)$3164$14206CAComputer Associates

$9.93$33.6$28.229.315.2$8062$35144SAPSAP AG (ADR)

$7.30$14.$11.927.924.3$9475$62282.ORCLOracle Corporation

$21.56$29.4$25.627.931.32187275738.MSFTMicrosoft Corporation

LowHighPriceP/ENetMarg

Rev(Mil)

Market (Mil)

TickerCorporation

Kurt Keutzer42

What they do• Microsoft Corporation (MSFT) PC Software (revenue

leader Application Software)• Oracle Corporation (ORCL) database, application

server (2nd highest revenue, Application Software)• SAP ADR (SAP) business management software (3rd

highest revenue, Application Software)• Computer Associates Int’l integrated software

solutions (4th highest revenue, Application Software)• Veritas Software Corp. (VRTS) secure and reliable data

management (5th highest revenue, Application Software)• Electronic Arts – video games (revenue leader

Multimedia & Graphics)

landay 22

Kurt Keutzer43

Software Industry – 8/2003 -2

$4.59$14.00$12.650.411.0$947$5054BEASBEA Systems, Inc.

$11.7$22.5$16.629.89.1$1,941$5,255PSFTPeopleSoft, Inc.

$38.5$86.8$51.632.625.3$831$6844INFYInfosys Tech

$27.2$51.5$47.930.117.6$1482$7196SYMCSymantec Corporation

$17.7$49.2$34.339.917.2$1197$8019ADBEAdobe Systems Inc.

$33.3$55.0$44.040.214.1$1643$9042INTUIntuit

LowHighPriceP/EMar%

RevMil

MarketMil

TickerCorporation

Kurt Keutzer44

And What they do …

• Intuit, Inc. personal financial software (7th highest revenue, Application Software)

• Symantec – (SYMC) computer and network security• Adobe Systems, Inc. PC application software • Symantec – computer and network security software• Infosys Technologies Ltd. (INFY) international software

conglomerate (4th highest revenue, Technical & System Software)

• PeopleSoft, corporate ``information factory management’’(5th highest revenue, Application Software)

• BEA Systems, Inc. (BEAS) internet business infrastructure/web servers (3rd highest revenue, Business & System Software)

landay 23

Kurt Keutzer45

Software Industry 8/2003 - 3

$3.92$16.1$13.9NM(28.4)$1112$3307VRSNVerisign

$15.2$45.6$39.852.715.1$444$3398MERQMercuryInteractive

$8.65$15.6$13.050.86.2$1136$3543CDNCadence Design

$12.6$22.2$16.216.658.2$425$3974CHKPCheck PointSoftware

$5.33$12.2$9.30NM(8.2)$1418$4595SEBLSiebel

$5.85$27.3$21.340.38.1$1427$4598DOXAmdocs Ltd

$31.8$65.5$65.0NM(16.2)$1106$5051SNPSSynopsys, Inc

LowHighPriceP/EMargRevMarket TickerCorporation

Kurt Keutzer46

And What they do …• Synopsys - (my old company) – software for the design

of integrated circuits (2nd highest revenue, Technical & System Software)

• Amdocs - billing and customer relationship management• Siebel Systems, Inc. (SEBL) enabling ecommerce

channels (8th highest revenue, Application Software)• Check Point Software Tech (CHKP) secure virtual

networks (2nd highest revenue, Security Software)• Cadence Design – (currently consultant) software for the

design of integrated circuits (revenue leader, Technical & System Software)

• Mercury Interactive – business application management• Verisign – the world's leading provider of critical

infrastructure and security services for Internet and Telecommunications networks

landay 24

Kurt Keutzer47

Assignments• Send email to niraj@eecs.berkeley.edu and

keutzer@eecs.berkeley.edu by 8AM Wednesday• Simply include answers as plain text in email, make sure your name

is in the email• Label each answer with question number• Use bullets and phrases, no one reads English prose anymore, but

be prepared to articulate and defend your answer well.

Kurt Keutzer48

First AssignmentAnswer THREE (your choice) of the following four questions:• Question 1a: Slides 9 and 13 give a basic ``cyclical evolutionary model’’ of a software market.

Give an example of a SW industry sector, market, or even product, that is making a transition from one stage of the cycle to another

• For example, a market in which successful companies are moving from providing bundled HW/SW to independently packaged (enterprise or consumer) SW

• Question 1b: What is causing this transition to occur?• Question 2: Is the software industry consolidating, or expanding? Choose a company or sector

and give evidence to support your position.• Question 3a: Interview question at a venture capital (VC) firm: Generally speaking, do you believe

that the software industry offers better, or worse opportunities than other technology sectors?• Question 3b: If better, give an example of an exciting new opportunity and why you like it. If

worse, what technology sector do you prefer and why?• Question 4: On slide 14, three additional factors are named which shape the software industry:

end-customer market dynamics, technological dynamics, and financial market dynamics. Give an example of how one such external factor will affect the software industry in the near future.

• Choose just one external factor, here are some hints:• 4a: End customer: Increasing pace of life is causing consumers to want more and more

continuous access to information and interfaces they need to run their busy lives … what’s next and what does that have to do with software?

• 4b: Technological: For example in the past, the personal computer had a dramatic effect on the software industry, providing for the first time a consumer software market. What technological devices are emerging and what software markets will they create or expand?

• 4c: Financial markets: How’s the current attitude on Wall Street or VC Street (Sand Hill Rd), going to affect the software industry?

landay 25

Kurt Keutzer49

Next Class• In class review of questions• If there’s time, an introduction to business implications of software

life-cycle and process